Published: November 20, 2012
In today’s complex and fast-changing markets, prudent risk management is more important than ever, including understanding the source of investment risk and ensuring it is appropriate for each portfolio. Credit risk is the risk that a security’s value will change due to a ratings downgrade or, in a distressed case, default of the security. For cash investors, the events of the last few years have undermined the very notion of ‘risk-free’. It has never been more important to find cash management solutions that fulfill the requirements of investors who have a highly conservative outlook for their cash.
Knowing that every holding within a money market fund (MMF) portfolio has been carefully selected and researched is key to giving investors peace of mind in this current environment. With the assistance of a strong credit analysis team MMF providers can ensure that the most conservative investments are made to meet one of the key features of MMFs – stability of principle.
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There should be a collaborative process for creating the approved lists that govern how a portfolio manager can invest. To earn the place on an approved list a thorough review of each issuer should be made with restrictions imposed on maturity.
The risk management team and credit analysts must work with portfolio managers while remaining independent from them. This allows risk managers to remain unbiased in their recommendations and portfolio managers can make more precise and informed decisions. Ultimately the credit analysts have the final say and should be constantly reviewing the approved list, with the ability to easily remove a name should the situation require.
The use of a strong risk analysis technology is also key to ensuring proper credit research and investors should check their providers have this in place.[[[PAGE]]]
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Figure 2 shows the outline of a framework for fundamental credit analysis and the key principles which should govern an approach to credit evaluation. A strong risk framework is created through independent research but augmented through use of external information such as ratings.
Our MMF portfolio managers benefit from BlackRock’s extensive resources with over 200 fixed income and liquidity investment professionals sharing market insight and research. BlackRock’s investment philosophy emphasises a commitment to fundamental research and independent credit evaluation. Our research team follows a rigorous process when assessing the creditworthiness of a security. In order to develop a formal view, we conduct both quantitative analyses of corporate capital structures and qualitative assessments of management and industry positioning. BlackRock has also developed proprietary tools that support the research process. For example, Galileo™, our global research database, allows analysts to share, store and access information and insights across asset classes and locations. GPLive™, our risk monitor, enables portfolio managers to view issuer exposure across portfolios on a real-time basis.
We understand our clients need us to anticipate the improbable and then prepare for it. It’s why we have maintained a high standard of analytical rigor and fact-based investing. In vast quantities of information, we seek the insights that can change outcomes. We dig deep to find the numbers behind the numbers. All of our expertise, analytical power and technical acumen are devoted to helping clients achieve the outcomes that they need. Our strong track record of restricting, suspending, or removing issues on our Approved Lists helps us deliver peace of mind to our clients in this changing world.
Recent market events have not caused us to change our approach, rather they have reaffirmed our commitment and conservative philosophy in managing this asset class.[[[PAGE]]]
Cash management is a distinct investment discipline that requires a specialised process for selecting appropriate counterparties. Investors need to be aware of the decisions that their providers are making in respect to credit risk so transparency is more important than ever before. Around the world regulators of MMFs have included requirements on credit quality in their guidelines which shows the importance of selecting a provider that carefully and diligently assesses the credit risk they are taking.
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